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Car Leasing versus Car Buying

{ Posted on Apr 08 2010 by Marcus Alston }

Floating on Car
So which scenario makes more sense for you, leasing or buying a new car?  The answer depends on a lot of factors.  If your goal is to save money in the long run and have ownership in the car, and you put under 12,000 miles on your car, then buying may makes the most sense.  If you prefer low monthly payments, better cash flow, a new car every 2 or 3 years, low maintenance costs, then leasing a new car may be for you.  Also, what fits in your budget?  Which one is best to allow you to cut expenses, reduce debt, save money, and build wealth under your financial plan? In either case, buying or leasing a car is typically a significant financial decision that should not be made lightly.

Here are few things to consider when trying determining whether to lease or buy a new car:

Leasing Pros and Cons. When you lease a car, you do not own it, a leasing company usually does.  The company allows you to rent the car for a defined term, usually 2-4 years.  At the end of the term, you must return it, unless you choose to buy it.  Costs typically include the first month’s car payment, a refundable security deposit, a down payment (sometimes referred to as a capitalized cost reduction), registration, taxes, and fees, and other miscellaneous charges. Car leasing is characterized by a lower monthly payment since you are only paying for the period of time you rent the car.  Most car leases limit the number of miles you may drive, typically to between 12,000-15,000 per year, and if you go over the limit, you have to pay a penalty per mile (often ranging from 10 to 25 cents per mile, depending on the vehicle).  However, you can negotiate a higher mileage limit, but you will have to pay a higher monthly payment.  Beware that most car leases also limit wear and tear to the vehicle during the lease term and if you exceed the limits, you will be charged.   At the end of the car lease, you will pay any applicable fees as described below and either return the car, lease the car again, buy the car at a pre-determined price, or finance the purchase or lease of a new vehicle.  If you elect to buy the car after your lease ends, you will end up paying more overall if you add up the lease costs plus the cost of buying the car after lease versus if you had decided to buy the car new originally.

Under the terms of a standard car lease, you may return the vehicle at the end of the lease term and pay any end-of-lease term charges such as:

  1. Disposition Fee.  A disposition fee helps pay for some of the expenses of the lease company in preparing the car for sale or re-lease.  These expenses may include vehicle inspection fees, cleaning and reconditioning costs, transportation costs, storage fees, auction fees, administrative costs, and vehicle depreciation.  Not all leasing companies charge such a fee, so read your lease agreement carefully.
  2. Excess mileage charges.  As stated above, under the lease you agree not to exceed a certain number of miles per year.  If you exceed the limit, you will be charged a fee (often between 10 and 25 cents per mile) for exceeding this amount.
  3. Excess Wear and Tear.  Your lease agreement should describe excess wear and tear.  Typical examples include:
    1. Missing, broken or severely damaged parts
    2. Dents or damage to the car body or trim
    3. Rips, tears, burns, or permanent stains in the fabric or carpet
    4. Smoke smell or other severe odor damage to the interior
    5. Overly worn tires
    6. Broken or cracked windshield, glass, or mirrors
    7. Poor-quality repairs or repairs that do not meet the leasing company’s standards.

Check your lease agreements regarding maintenance and repairs and make sure that you maintain receipts and copies of all maintenance performed.

After you return the car and settle the end of term charges, you are free to go.  Note:  There are termination charges if you terminate the lease early.

Buying Pros and Cons.  You own the vehicle and get to keep it at the end of the loan term.  Costs typically include the cash price or a down payment, taxes, registration and fees, and other charges.  Your monthly car loan payments will be higher than monthly car lease payments because you are paying for the entire purchase price of the vehicle.  Interest, other finance charges, taxes, and fees are higher as well with a purchase versus a lease. While you do own your vehicle, you will have to sell or trade-in the vehicle when you decide you want a different vehicle.  You are not subject to mileage or excessive wear and tear limits and may drive as many miles as you want, although high miles and excess wear and tear will reduce the trade-in and resale value of your car.  After you have paid off your car loan, you will not have any more car loan payments.

Conclusion. Buying or leasing both require you to do some minimum research to protect yourself and make sure that you are getting the best deal and understand the requirements.  Leasing is a little more complicated and should be thoroughly researched.  If you are not going to do your homework on leasing or do not consider yourself a savvy consumer, I advise buying.  Ultimately, whether to lease or buy is a financial and personal choice.   Further complicating the matter is if you want to have a vehicle on a daily basis you do not have to buy or lease a new car—you also have the option of buying a used car.  Find out what I do in tomorrow’s post.

Did you find this helpful or interesting?  Please write a comment below.

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5 Responses to “Car Leasing versus Car Buying”

  1. My family owns a car rental shop but its well known to provide good service and good cars. Even our town mayor would rent a car in our shop. We have customers who like to rent our cars. I guess it’s a practical thing to do when you don’t own a car. We hope to make widen the scope of our business soon.

  2. Good luck on your family car rental business business. Renting a car instead of owning one can really make a lot of sense (cents) for your customers.

  3. Great work! keep the posts coming… i’ll keep reading them. Thanks

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